CH2 - Notes

CH2 - Notes - CHAPTER 2 CONCEPTUAL FRAMEWORK UNDERLYING...

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CHAPTER 2 CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL REPORTING CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL REPORTING Conceptual Framework 1st Level = Ba- sic Objectives 2nd Level = Fundamental Concepts 3rd Level = Foundational Concepts & Conventions Financial Re- porting Issues Identify account- ing goals & pur- poses Characteristics that make ac- counting info useful Used in estab- lishing & applying accounting standards Rationale Qualitative Char- acteristics Economic Entity Accounting Choices Development Basic Elements Going Concern Issue Identifica- tion Monetary Unit Financial Engin- eering Periodicity Fraudulent Finan- cial Reporting Historical Cost International Revenue Recog- nition Matching Full Disclosure Uncertainty Cost-Benefit Materiality Industry Prac- tices USEFULNESS OF A CONCEPTUAL FRAMEWORK Conceptual Framework = is like a constitution --> it is a “coherent system of interrelated objectives & fundamentals that can lead to a consistent set of standards and that prescribes the nature, function & lim- its of financial accounting & statements”
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It is a negotiation between the accountants and the information they are able to provide and the information that the users require to make decisions Rationale for Conceptual Framework: Creates standards for the accounting profession Enhances compatibility of financial statements of different companies Development of a Conceptual Framework: 1976 FASB published “Conceptual Framework for Financial Accounting & Reporting: Elements of OBJECTIVES OF THE CONCEPTUAL FRAMEWORK The framework is a reference of basic accounting theory for solving new & emerging practical problems of reporting This framework can be illustrate as follows: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING: CONCEPTUAL FRAMEWORK - OBJECTIVES To provide information: Useful to those making investment & credit decisions = banks & investors are deciding whether or not to reinvest Useful in making resource allocation decisions = management deciding how to use scarce re- sources Useful in assessing management stewardship Financial statements provide information about: The economic performance of the entity CONCEPTUAL FRAMEWORK - QUALITATIVE CHARACTERISTICS The 2nd Level is necessary as it provides certain conceptual building blocks that:
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Explain the qualitative characteristics of accounting info Define the basic elements of financial statements These building blocks form a bridge between the why of accounting (objectives) & the how of account- Choosing an acceptable accounting method to disclose information requires us to decide which altern-
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CH2 - Notes - CHAPTER 2 CONCEPTUAL FRAMEWORK UNDERLYING...

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